Business with no borders

Companies thrive when they are able to create sustainable competitive advantage against other players who are out to steal their breakfast, lunch - and possibly also their dinner.

In an increasingly global economy, countries such as China are wisely opening their borders to trade and investment by multinational corporations from almost any part of the world, be it the United States, the United Kingdom, Germany, Japan, South Korea, or India.

In an open and welcoming environment such as this, the comparative advantage of China as a location is available as much to a Cisco or a Google as it is to a Huawei or a Baidu. There is no obvious reason why smart young Chinese should necessarily prefer to work - or not to - for a domestic Chinese company rather than the China-based operations of a multinational from another country.

If China has high caliber talent available in large numbers and at a reasonable cost, this asset can and will be capitalized on just as well by foreign multinationals as by Chinese ones. In other words, in an open economy, global competitive advantage depends far more on how the company is organized and managed than it does on whether it happens to be Chinese, American, Japanese, or Indian.

For any multinational firm, there are three primary sources of global competitive advantage - optimality of value chain architecture, competence base and scale of operations at each location and effectiveness and efficiency of coordination across the global network. Like the legs of a stool, these three sources work in tandem as a system. A major weakness in any one of them can be enough to sink the company.

Value chain architecture

The operations of every company can be disaggregated into a number of value chain activities such as basic research, product development, component manufacturing, subassemblies, final assembly, sales, service, etc. For each activity, value chain architecture refers to the number of locations globally where the activity is performed, the identity of these locations, and the strategic mission assigned to each location. There is no universally optimal global architecture such as concentration in one location or dispersion to many locations. What is globally optimal varies across companies as well as across value chain activities within the same company. Further, what is optimal tomorrow may differ from what is optimal today. For a company such as Huawei, the optimal architecture for research and development (R&D) is concentration in a very small number of locations. In contrast, the optimal architecture for sales and service is decentralization to almost every country where Huawei does business.

Microsoft's decision to set up a corporate research lab in Beijing and assign to it worldwide responsibility for research on user interface technologies is an example of an architectural decision. So is the decision by GE to shift a substantial chunk of their core R&D activities from the US and other locations to newly set up R&D centers in Shanghai and Bangalore.

Architectural decisions are important because they fundamentally affect the cost, quality, and speed with which the company can accomplish a particular task. It is impossible to imagine how Nike or Reebok could survive for even one year if they were to be manufacturing shoes in the US or Europe rather than in Asia or, if in the early 1990s, they had not shifted the production base from an increasingly expensive South Korea to cheaper locations such as China and Vietnam.

Competence base and scale

Picking the right locations is crucial. However, the effectiveness of the company's operations at each location is often even more crucial. Effectiveness at the location depends on the competence base embedded in the people and the organization as well as on the scale of operations. South African Breweries, a unit of SAB Miller, one of the largest beer companies in the world, provides a good example of how, even within the same industry and country, the competence base of different companies can vary widely.

SAB is one of the few beer companies from outside China to have succeeded with domestic operations within China. Before entering China in a joint venture partnership with China Resource Enterprises, SAB had considerably greater experience at managing operations in developing economies than its competitors from Europe or the US

As a consequence, in China, unlike other multinationals, its joint venture company proved to be much more skillful at acquiring and restructuring a number of formerly State-owned breweries thereby creating a huge early mover advantage for itself.

Coordination across the globe

The third driver of global competitive advantage is the effectiveness and speed with which the multinational firm is able to coordinate its activities at various locations. The need for and the payoff from effective coordination is generally multi-pronged. If your supply chain is globally dispersed, the salience of effective global coordination is all too obvious.

This is a lesson that Nokia learned well after a crisis in the mid-1990s. Nokia managers believe that they have at most a few weeks' technology advantage over competitors. In order to capitalize on this advantage, it is crucial that Nokia's global supply chain coordination be absolutely first rate. There is little to be gained from a few weeks' advantage in the corporate labs if all of this advantage gets dissipated by the time products actually get produced and distributed to the marketplace.

The benefits from effective global coordination go beyond supply chain management. Consider the benefits from sharing of know-how across the global network. As Unilever has discovered, lessons regarding successful rural marketing can be profitably transferred from India to Brazil saving a lot of wasted time and costs.

Yet another benefit from effective global coordination manifests itself in the form of smarter competitive strategies against other global players. Take Coca-Cola vs Pepsi-Cola. The two companies compete in virtually every country on earth. Might there be an advantage in viewing this global war as analogous to a game of chess where it's not your pawn against the opponent's pawn; rather, it's your entire portfolio against the opponent's entire portfolio. In other words, there might be advantage in looking at your strategies across countries in a coordinated rather than disjointed fashion?

We are very rapidly moving towards a scenario where major competitors in most industries in most countries will all be multinational players. Some of these might be headquartered in the US, others in Europe, yet others in Japan, China, India, or Brazil. At that point, as is already true in the case of General Motors versus Toyota, it would be pointless to focus on which company has greater global presence than its competitors. Rather, the really important question would be which company is smarter at converting global presence into global competitive advantage. General Motors is bigger than Toyota and has been present in more markets for longer periods than the case with Toyota. Yet, look at who's the winner. The race is won not by those who are just merely bigger but by those who are smarter.

Anil K. Gupta is the Ralph J. Tyser Professor of Strategy at the Smith School of Business, The University of Maryland at College Park.

Haiyan Wang is Managing Partner of China India Institute, a research and consulting organization. They are the co-authors of The Quest for Global Dominance, Jossey-Bass/Wiley, March 2008. They can be reached at agupta@rhsmith.umd.edu and hwang@chinaindiainstitute.com.